Workday's Stock Just Dropped, but AI Adoption Is Growing -- Should You Buy the Dip?

Core Insights - Workday has established itself as a leading financial and human capital management software company, but its stock has remained stagnant for years, trading at levels similar to the end of 2020 after a 12.5% drop following its fiscal 2026 Q1 earnings report [1][2] Financial Performance - Workday's fiscal 2026 Q1 results exceeded analysts' expectations, with revenue rising 12.6% year over year to $2.24 billion and subscription revenue climbing 13.4$2.06 billion; adjusted earnings per share increased by 28% to $2.23 [4] - The company's 12-month subscription revenue backlog grew by 15.6$7.63 billion, while total subscription revenue backlog increased by 19% to $24.62 billion, indicating potential future revenue growth [7] - Operating cash flow for the quarter was$457 million, and free cash flow was $421 million; the company ended the quarter with$8 billion in cash and marketable securities and nearly $3 billion in debt [8] Strategic Initiatives - Workday is focusing on artificial intelligence (AI) to drive growth, with 25$8.8 billion and increased its adjusted operating margin forecast from 28% to 28.5%, up from 25.9% last year [9] - For fiscal Q2, subscription revenue is expected to grow by 13.3% to $2.16 billion, with an adjusted operating margin of about 28% [9] - The company has not observed significant impacts from tariffs or macroeconomic challenges, and it anticipates slight acceleration in subscription revenue growth in the second half of the year [10] Valuation Metrics - Workday's stock trades at a forward price-to-sales (P/S) multiple of 6.7 and a forward price-to-earnings (P/E) of 27, which appears compelling for a high-margin business with strong customer retention and mid-teens revenue growth [12] - The company's operating leverage is leading to faster earnings growth, despite a slowdown in revenue growth over the years [11]